What Would the World Look Like if Economists Were in Charge?

Podcast

Freakonomics Radio

Pretend for a moment that our highest elected officials, instead of acting like the lawyers that they are, were replaced by economists. You’ll hear from the economists Steve Levitt and Russ Roberts, former Estonian prime minister Mart Laar, and from a grandson of Milton Friedman about this supposedly rosy future.

We’ve just released the third episode of our Freakonomics Radio podcast (here at iTunes; RSS feed here; or listen live via the box at right), and this one strikes close to the heart of many readers. It asks a simple speculative question: What would the world look like if economists were in charge?

You’ll hear a bit from Steve Levitt about the economist’s worldview in general, and how it differs from the politician’s. You’ll also hear from the very insightful Russ Roberts, a professor of economics at George Mason University who also blogs, has a podcast of his own, writes books, and produces rap videos. Here’s a cut of Roberts’s interview:

SJD: Okay, let’s play a fantasy game for a minute and pretend that you, Russ Roberts, a creative and very bright economist come to Washington and are put in charge of the whole country. And unlike every other economist that’s ever gone to high office, you don’t start acting like a politician. You really act like an economist from day one. So you get there, you’re behind the desk, you’ve got a pen and paper. What are some of the first things you do as soon as you arrive?

RR: I’m getting goose bumps, it’s so exciting. Well, what I would do? Let’s start with some obvious things. I would get rid of the Department of Commerce. The Department of Commerce doesn’t do anything except subsidize exports, which is just a way of saying it makes certain companies rich at the expense of the rest of us. So I don’t think the Department of Commerce does anything particularly useful, I would get rid of that. I’d get rid of the Department of Education. I don’t think that the Federal Government has any productive role to play in the school system. I’d get rid of all tariffs. I’d let people be free to buy whatever they wanted from all around the world. What else? I would get rid of the minimum wage law, which I think makes it hard for low-skilled people to find work; it makes them artificially expensive. I’d change the Federal Reserve. We spend a lot of time trying to find the right interest rate. That’s a fool’s game that has contributed to the current crisis. So I would change the Federal Reserve. I would certainly at a minimum require it to only care about price stability. Right now it cares about price stability, unemployment, the health of the stock market, Wall Street salaries, evidently. So I would get all of those things out. It’s going to be hard to do legislatively, so I would probably replace the the Fed with a Friedmanite fixed growth and money supply or just abolish it entirely and let private money emerge. I’m getting out of control here.

The program also features an interview with Mart Laar, a two-term prime minister of Estonia who has been widely credited with turning a downtrodden former Soviet republic into a “Baltic Tiger.” How did this happen? As Laar tells it, he essentially channeled the spirit of Milton Friedman:

ML: First of all, when you grow up and develop under the Communists, then first of all you see what is not working, and that means that the Communism is not working and all those left-wing socialist ideas of state control and so on, they are just not working. They are against the human nature, and they will fail. Which means that when you read the Soviet newspapers about one man who is especially dangerous, especially crazy, and absolutely mad, and we should destroy all the human beings and the economies and so on, and this man was called Milton Friedman. And of course I became interested and when I first read Milton Friedman, it was my first book on economy that I ever have read. Then of course I was very interested because I think most of the ideas were simple but here they looked like work. And when I became the prime minister I decided, Why not.

You will hear an interesting story about Laar introducing the flat tax, a Friedman favorite, to Estonia, and about Laar’s meeting with Margaret Thatcher, whereupon he learned that the flat tax was not as commonly applied as he thought.

You’ll also hear from Friedman’s own grandson, Patri Friedman, whose personal belief is that the U.S. government is such a sclerotic oligarchy that the best solution is to start a new civilization in the ocean. That’s what led to his founding the Seasteading Institute. Here’s a look at a couple of possible seasteading options:

Photo: seastading.orgExterior of Clubstead, a 200-guest hotel/resort designed “to withstand the waves off the coast of California.”

And finally, this being Freakonomics, you’ll also hear from Allie, the high-end call girl featured in SuperFreakonomics, talking about what her business would look like if the economists took over and legalized prostitution — along with drugs like marijuana and cocaine, and a market for human organs …

Audio Transcript

Stephen J. DUBNER:So if you would please just tell me your name and what you do.

John ZOGBY:John Zogby, pollster. I’m the Zogby poll.

DUBNER:So John, you know what Americans think about a lot of things. Now what do Americans think about politicians, the people running our country right now?

ZOGBY: It’s pretty much at a low point. Right now members of congress get less than ten percent positive rating for performance and ethics. There have been times in the last year where’s it’s been up to like, 20 percent or so. But to give you an idea, when we’re talking single digit positive, I used to poll for another New York newspaper and back in 1995 OJ had a 16 percent approval rating.

DUBNER:Umm, so, worse than suspected murders?

ZOGBY:Uh, maybe a tie, but whatever it is, it’s not good.

DUBNER:Now, what about lawyers? How do Americans feel about lawyers these days?

ZOGBY:Also not well. Lawyers in fact, as of December specifically, 13 percent positive rating. That puts them four points ahead of stockbrokers and members of congress.

DUBNER:So tell me this, we don’t like politicians, we don’t like lawyers, so why do we elect so many lawyers to run the country? The president’s a lawyer, the vice president, the secretary of state, a whole lot of others; about 6 in 10 US senators are lawyers, why?

ZOGBY:I guess nobody who’s self respecting want to run for congress.

ANNOUNCER: This is Freakonomics Radio, a new podcast about the hidden side of ... everything. In this episode, Henry the sixth, a politician himself, said it best: The first thing we do, let's kill all the lawyers. And then: what if -- wait for it -- what if economists got to run the world? We'll hear from a high-end call girl; an Estonian who ran his country according to the gospel of Milton Friedman; and a guy who wants to start building new nations in the middle of the ocean. Here's your host, Stephen Dubner.

Steven D. LEVITT:Well, mostly economists just sit around in their offices, and they complain to other economists about the fact that no one listens to them, and if only we got to run the world, it would be such a better place.

LEVITT:Well economists don’t really care what other people think about them. I think that might be the first and the biggest thing. Politicians have to say and do things that they think other people will like, whereas economists don’t have enough social skills usually to actually realize that the things that they say and do offend others. I cannot remember going to a party with my wife where after we left she didn’t chide me for having insulted or berated or challenged someone in a way that was completely and utterly beyond the social norm. And I had no idea! Every single time, we don’t go to that many parties, but every single time we go I’m amazed that she tells me at this party, just like the last one, I did something wrong.

DUBNER: Economists are by nature candid. Maybe too candid. That's because they base their arguments on what the data have to say -- rather than how politics or morality might dictate. A solution that might strike an economist as perfectly rational might strike the rest of us as deeply repugnant. They have a lot of ideas to improve the world -- but they're mostly ignored. So today, we have a modest proposal. For the next 20 minutes or so, let's put away the politicians -- and let's put the economists in charge. We're going to start with the very strange case of Estonia.

Mart LAAR:My name is Mart Laar. I have been twice Prime Minister of Estonia, and I'm not an economist.

DUBNER:Starting in 1992, Mart Laar helped change Estonia from a downtrodden former Soviet satellite to what some people called a Baltic Tiger. And while it's true that Laar is not himself an economist, he did his job by channeling one of the most renowned economists in history.

LAAR:When you grow up in the Soviet society under the communists you heard about the one man who is especially dangerous, especially crazy, and absolutely mad, and which would destroy all the human beings and the economies and so on, and this man was called Milton Friedman.

DUBNER:Milton Friedman, the University of Chicago economist, the 20th century's most passionate advocate of free markets.

LAAR:When I first read Milton Friedman, Free to Choose, and to be real it was my first book on economy what I ever have read. Then of course, I was very influenced because I think most of the ideas were simple, they were clear and they looked to work. And when I became the prime minister then I decided, why not? As I was not so much informed what has happened in the world so I was sure that most of the countries in the world have instituted from long time ago the Milton Friedman ideas, and then I decided just to follow them.

DUBNER:So you read Free to Chooseby Milton Friedman –

LAAR: Yep

DUBNER:And you thought well this stuff sounds great and it sounds very logical, there probably wouldn't be a book like this if he hadn’t gotten to do all these things so since they did them in the US, I should do them in Estonia, right? That's the idea?

LARR:Yes, more or less, yes.

DUBNER:And at what point did you find out that much of what Milton Friedman advocated he never actually got to do, like a flat tax in the US?

LAAR:I got it quite quickly actually. The flat tax I got on my first meeting with Margaret Thatcher, who I admired very much and who was a great admirer of Milton Friedman. I met her first when I had been prime minister I think for some months and so on, and when I told her what I am planning to do, she looked at me with these big eyes and said “you are one brave young man.” And then a little bit introduced me on the realities of the Western world on which I was not very well informed. But I didn’t stop.

DUBNER: Laar treated Friedmans’s book as his Bible as he started governing Estonia. HE abolished tariffs, to encourage international trade. He privatized 90 percent of the economy. He particularly liked the idea of a flat tax. One tax rate for everyone, nice and simple. And promptly instituted it.

LAAR:Within my first meeting when I proposed to introduce the flat tax in Estonia they looked on me as I am a little bit crazy. And asked “do you know something on the economy” and I answer “economically, no not so much.” But I think this is a great idea because it looks to work. And I didn’t know then that I would be the first one to see this, but I introduced it. I was 32, I was young and crazy, so I didn’t know what is possible and what's not, so I did impossible things.

DUBNER:Mart Laar's reforms were generally considered a success. And you know what -- there are a lot of countries, more than 30, where the highest elected official has an economics background. But let's come back across the Atlantic, to Washington, and let's dream a little. Here, economists don't get to be president. It's true that Gerald Ford, Ronald Reagan, and the first George Bush were economics majors in college, but they all quickly moved on to something else. What if we took a real-life, practicing economist, full of good ideas, and gave him the keys to the Oval Office?

Russ ROBERTS:I’m getting goose bumps it’s so exciting.

DUBNER:This is Russ Roberts. He's a professor of economics at George Mason University.

ROBERTS :I’d get rid of the department of education. I don’t think that the Federal Government has any productive role to play in the school system. I’d get rid of all tariffs. I’d let people be free to buy whatever they wanted from all around the world. Uh, what else? I would get rid of the minimum wage law, which I think makes it hard for low skilled people to find work; it makes them artificially expensive.

DUBNER: Wow, cutting the Department of Education? Abolishing minimum wage? Now you start to get the idea of why economists are so popular at parties.

ROBERTS:I’d legalize all drugs. Besides -- cocaine and marijuana, which I confess to never have tried. I'm 55 years old. I'm the only 55 -year-old --

DUBNER:You still have time Russ, you still have time.

ROBERTS:I know a couple, a few friends of mine who claim to be in the same virgin space. I say that only because people assume that if you’re in favor of legalized drugs it’s so you can get high all the time. I want a world where you’re free to get high and you’re free not to get high. I don’t want my kids to take drugs. I don’t want to take drugs of those kind, but I think that should my choice and not the government. By making cocaine and marijuana legal we’d free up millions of dollars currently wasted on trying to keep it out of peoples’ hands, which doesn’t work. It’s a totally ineffective law. And we’d go back to a law where we would say it’s legal but it’s not a good idea. It’s like TV. TV is legal, you can watch it all you want. But it’s still not a good idea to watch too much. It’s up to us as adults to try to figure out about TV, and candy bars, and marijuana, and scotch, how much of that we’re going to use, and how much a responsible person is going to consume. For some folks it’s zero, for others it’s way too much. That should be their choice.

DUBNER:What would you do about prostitution?

ROBERTS:Should be legal. I’ve never gone to a prostitute either. I guess this is confession time. But it should be legal because I think activities between consenting adults are nobody’s business but their own.

DUBNER:Alright, so that's the theory. Why don't we ask a real prostitute?

ALLIE :My name is Allie and I worked as an escort for about 8 years in the United States, and I guess what people would classify as a high-end escort, charging between 300 to around 600 dollars an hour.

DUBNER You’ve since retired, correct?

ALLIE:I have. I have retired and went back to school.

DUBNER:Ok, and what are you studying?

ALLIE:Economics.

DUBNER:You were what just about anybody in the world would think of a really successful business person. You set up this business – now it happens to be an illicit business – but you set up this business and ran it well and ran it efficiently, and made a lot of money, right?

ALLIE:Yeah, I did. I mean, looking back, I didn’t know all the terms, I kind of learned by doing. But I had huge profit margins, yeah.

DUBNER:In the entire time you were working as a high end call girl - 8 years worth, were you ever arrested?

ALLIE:No

DUBNER:Did you ever come close to being arrested?

ALLIE:Not that I know of.

DUBNER:If there’s one thing that people think is true about prostitution, especially at the high end, but it’s not, what would it be?

ALLIE:I would say that the guys are paying for crazy sex acts. I think you hear this all the time, if he’s paying 1,000 dollars an hour no telling what he’s doing to that poor girl, right? I found that the more that the clients pay, generally, the less sex that’s happening. They’re paying for companionship, and just company, and to be able to relax and be themselves. And sex.

DUBNER:The premise of this episode is what the world would like if economists were in charge, ok? And most economists as you probably know, would argue that prostitution should be legalized, there are a whole lot of reasons why that is so. Now what if it were made legal? How would that change your business if you were still working as a prostitute?

ALLIE:I think obviously it would make probably make the prices go down a little bit. Although, people talk about maybe more girls would enter into the market. I think maybe a few would be. The thing is that generally the barriers to entry for women to get into the business are more values and the way that they’re seen in society. I think more than -- I mean obviously more than their costs, because it’s a relatively inexpensive business to get into.

DUBNER:So that's what might happen to prostitution if an economist like Russ Roberts were in charge. There'd probably be more Allies, but they'd make a bit less money -- and they'd pay taxes. People with moral objections wouldn't patronize her business. The market would decide. A nation run by economists would be a nation where the government wasn't making as many moral judgments -- which, interestingly, might mean the end of "values" voters. I wonder ... is there anything else Roberts might want to take care of while he's still in office?

ROBERTS:I’d change the Federal Reserve. We spend a lot of time trying to find the right interest rate. That’s a fool’s game that has contributed to the current crisis. So I would change the Federal Reserve. I would certainly at a minimum require it to only care about price stability. Right now it cares about price stability, unemployment, the health of the stock market, Wall Street salaries, evidently. So I would get all of those things out. It’s going to be hard to do legislatively, so I would probably replace the Fed with a Friedmanite fixed growth in money supply or just abolish it entirely and let private money emerge.

DUBNER:Ah, it all comes back to Milton Friedman. He died just a few years ago, at the age of 94. Most people don't know it, but we're living a lot of his ideas today. You know how your paycheck has taxes automatically withheld? That was a Friedman argument. Our 100% volunteer army? A Friedman idea. School vouchers? Friedman. The reboot of Estonia happened only because Mart Laar believed in Milton Friedman's ideas. But when you look at Washington today -- holy cow, politics has become so broken that Friedman's own grandson -- all he wants to do is go out to sea.

Patri FRIEDMAN:I’m Patri Friedman and I founded the Seasteading Institute, a nonprofit which researches how we can let people build new societies on the ocean.

DUBNER:Ok, now your father David is an economist, and two of your grandparents, Rose and Milton were economists, and some people consider Milton Friedman to be one of the most influential economists who ever lived. So, what would you think of a world where instead of politicians running things, the economists were in charge?

PATRI:That’s kind of the world that I’m trying to create with seasteading. The way I see it is, the way to get economists to be in charge of government is to put businessmen in charge of government. That is, if we make government more of a market commodity with different citizens, different businesses, looking at different countries and picking the ones that really fit their values and work efficiently, that the businesses that operate these countries will naturally hire economists to tell them what is the best way to run a country and they’ll run experiments.

DUBNER:What do you, Patri, what do you dislike so much about government, particularly the US government, that you are willing to go and invent floating cities on the ocean?

PATRI:Well I’m one of those crazy libertarians, so I dislike most of the laws of the US government, but one of the things that I love most about seasteading is that it will work even if I’m wrong about what will make a good society. I mean, while I’m out there starting my crazy libertarian society, hopefully lots of other people will be trying other very different types of societies and if my crazy libertarian world turns out to be a bit too crazy and not a good place to live I can go switch and live somewhere else.

DUBNER:If economists were in charge just list for me some of the big changes that would happen right off the bat?

PATRI:If economists took over I think we would see a lot of deregulation. I think we would see the government doing a lot less. I think we would see federalism. I think that school would be run by vouchers. And then the economists would be quickly out of power as the teachers unions marched on Washington in their millions and seized the economists and through them out of high story windows.

DUBNER:The defenestration of economists in Washington.

DUBNER: Economists think they have a lot of answers -- and they probably do. But in a culture like ours, a lot of those ideas would be grossly unpopular. We seem to be stuck with a super-partisan government with no real competition. Milton Friedman's own grandson thinks Washington is such a sclerotic oligarchy that he wants to leave civilization behind, starting over in the ocean. Of course, we could send all the politicians out to sea instead, but that's another podcast for another day.

In the meantime, maybe we should put a little more faith in economists?

Or ... maybe not. Steve Levitt told me a story once, about the economist's favorite tool: the power of incentives. He and his wife were trying to potty-train one of their kids, Amanda.

LEVITT :She had been potty trained, and then had completely lost the interest in it, and my wife had done everything that the experts told her to do, and nothing had worked—gone on for six months. So I said to my wife “Look, I’m an economist. Everything’s about incentives. I understand how to incentivize people, let me take control. I got down on Amanda’s level, maybe three years old, and said “Amanda, every time you go pee pee in the potty I’m going to give you M&Ms.” OK? Because M&Ms were the thing she cared about most. And she said “really?” I said “yeah.” She said “well I’ll go right now!” I said “OK,” and she went right into the bathroom, and goes potty, I give her the M&Ms, and I turn to my wife and I say “just let the expert handle the problem.” You know, it worked great for about two days. Every time Amanda had to go to the bathroom she would announce it publicly, she’d go in there, we’d give her the M&Ms, couldn’t have been better. Then on about the third or fourth day she said, I have to go the bathroom. I went in there with her, and she tinkled out two or three drops. And I thought, ok she didn’t have to go that badly. I gave her the M&Ms. Not more than two or three minutes passed and she sad, I’ve got to go to the bathroom. She went in there she tinkled out a few more drops, I gave her the M&Ms. And it turned out that she was just going to do that to infinity. My three-year-old daughter had figured out such bladder control within three days that she now was able to go on demand. And she had figured out how to game a system that a world-leading economist had come up with. It’s really a cautionary tale to economists – when you come up with incentive schemes that even your three year old daughter can undo in a few days? What does that mean when you come up with an incentive scheme the whole world – you know, two, three hundred million people are out there strategizing against it, trying to beat you? You know you’re going to get beaten.

I have a big problem. I love Freakanomics podcasts, but so far there have been released and there have only a few and most are short. Please consider your iTunes fans and give us timely (weekly?) podcasts to listen to that are at least 20 minutes. Otherwise you are wasting our time and killing our anticipation to enjoy more of an econmics point of view.